Investing in risky assets is a probabilistic endeavor. There are no guarantees, that is indeed why the returns can be greater than non-risky assets. Taking on risk is the price all investors pay for the potential for greater returns. However, taking risk doesn’t guarantee a better return, it just is one of the requirements for the possibility of a greater return.
Question: Want to load the probability curve in your favor?
Answer: Zig when the market zags.
Question: What does this mean?
Answer: Let’s look at history as a guide to give some perspective on what you might consider doing.
Here are the stock market returns one year after the bottom during the three most recent major market downturns:
Great Recession (2008-2009)
- The market bottomed on March 9, 2009, with the S&P 500 at 676 points.
- One year later, in March 2010, the S&P 500 had risen to around 1,150 points, marking a 70% gain over the one-year period.
Dot-Com Crash (2000-2002)
- The market reached its bottom in October 2002, with the Nasdaq at approximately 1,114 points.
- By October 2003, the Nasdaq rebounded to 1,887 points, reflecting a gain of 69% in one year.
COVID-19 Crash (2020)
- The market hit its bottom on March 23, 2020, with the S&P 500 at around 2,237 points.
- By March 2021, the S&P 500 had surged to 3,900 points, giving investors a 74% return in one year.
These periods highlight the power of buying when most investors are selling. Essentially all three periods experienced 70%+ returns over the next year. Incredible returns to say the least.
This tells us, you can do very well, by doing the opposite of what most others are doing during periods of frantic selling. Of course, it’s not a guarantee, but you are stacking the odds in your favor.
It’s a bit like counting cards at the casino, and who doesn’t like to beat the house.
Hit the easy button.
-Paul R. Rossi, CFA